Breakingviews - Sterling appreciates Brexit deal more than bankers

Union Flags and European Union flags fly during the anti-Brexit 'People's March for Europe', in Parliament Square in central London, Britain September 9, 2017. REUTERS/Tolga Akmen

LONDON (Reuters Breakingviews) - Sterling is drawing more cheer than bankers from signs that Britain may be closer to securing London basic access to the European Union’s financial services market. The bankers are probably the better judge of how much there is to celebrate at the moment.

The deal, which would give Britain a similar level of access to the EU as major U.S. and Japanese companies, was nearly done, an unnamed British official told Reuters. Under so-called third-party equivalence rules, foreign banks can ply their trade in the EU as long as the bloc deems that their regulations are sufficiently aligned with the EU’s own. While Prime Minister Theresa May’s spokesman later dismissed talk of an accord as speculation, even a whiff of progress was enough to boost the pound more than 1 percent against the dollar.

Fettering the flow of money from London could raise the costs of accessing that capital for companies in Frankfurt and Paris. Banks – US wholesale lenders in particular – are having to establish separate pools of capital in the EU to service regional clients, rather than relying on a central balance sheet in London. That raises banks’ costs, some of which will be passed on to customers. Any deal which allows them to broadly maintain the status quo in London is therefore welcome.

But more details need to be confirmed to judge whether the currency market’s enthusiasm is warranted. British finance minister Philip Hammond has lobbied for “enhanced” equivalence, which would mean that rules cannot be changed at the EU’s whim. Instead, any disputes would be subject to arbitration and the EU’s current one-month notice period before withdrawing access would be extended for an unspecified period, according to a report in the Times newspaper on Nov. 1.

Such enhancements are important. For example, the EU’s current equivalence arrangements don’t cover key areas such as commercial lending or deposit taking. A financial services deal which ignored these issues may “be as good as a hard Brexit” according to one senior City lawyer. That would be good for neither bankers nor the pound.

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